REITs pave the way for in­di­vid­ual in­vest­ment in real es­tate Bud­get 2015 brings REITs closer to re­alty

REITs en­able peo­ple with a risk ap­petite to in­vest in the real es­tate mar­ket with­out the need for a large cap­i­tal com­mit­ment REIT reg­u­la­tions ex­pected to bring much-needed re­lief to cash-strapped de­vel­op­ers

HT Estates - - HTESTATES - Nan­dita Tri­pathi Nan­dita Tri­pathi

REITs or real es­tate in­vest­ment trusts, much like mu­tual funds, are es­sen­tially ve­hi­cles that raise money via in­vestors and in­vest the sum col­lected into real es­tate as­sets such as shop­ping cen­tres, of­fices, com­mer­cial spa­ces, etc. The in­come gen­er­ated from real es­tate in­vest­ment of REITs is dis­trib­uted amongst its unit hold­ers or in­vestors.

A key fea­ture that makes the REIT struc­ture at­trac­tive is that it pro­vides an av­enue for in­di­vid­u­als to foray into the real es­tate mar­ket with min­i­mal in­vest­ment com­mit­ment. In­vestors tra­di­tion­ally putting their money in the re­alty sec­tor are ex­pected to in­vest in ei­ther res­i­den­tial or com­mer­cial prop­erty, which would re­quire sub­stan­tial cap­i­tal. On the con­trary, in­vest­ment in REIT may cost as less as ₹ 2 lakh. This al­lows even the mid­dle in­come in­vestor to par­tic­i­pate in the sec­tor, pre­vi­ously out of reach due to the high en­try price bar­rier be­cause of high prop­erty val­ues.

As units of the REIT are listed, in­vest­ment in the trust also pro­vides liq­uid­ity to an in­di­vid­ual in­vestor which in­vest­ment in real es­tate as­sets does not of­fer. This is be­cause sale of prop­erty may take a few weeks or months. Fur­ther, in­vestors putting their money in REITs can also avail of a par­tial exit fa­cil­ity which means that they can par­tially sell off their hold­ing, which may not be typ­i­cally pos­si­ble in case of di­rect in­vest­ment in a real es­tate as­set.

REITs pro­vide a reg­u­lated plat­for m to the i ndi­vid­ual in­vestor and is a trans­par­ent in­vest­ment ve­hi­cle, much like a mu­tual fund, with ex­pe­ri­enced pro­fes­sion­als and fund man­agers that iden­tify and man­age in­vest­ments. Due-dili­gence is con­ducted by REIT man­agers prior to an in­vest­ment, thus sav­ing in­di­vid­ual in­vestors the has­sles of car­ry­ing out back­ground checks of prop­erty builders and de­vel­op­ers.

An­other ad­van­tage is that in­di­vid­ual in­vestors get an op­por­tu­nity to in­vest in a di­ver­si­fied port­fo­lio in the re­alty sec­tor. Units of REIT de­rive value af­ter they are in­vested in sev­eral projects, thus di­ver­si­fy­ing the over­all in­vest­ment risk and re­turn for the in­vestor.

REITs has been ac­corded a ‘ tax pass- through’ sta­tus, which means that unit-hold­ers will be taxed for the in­come that they earn from REITS and not the trust. The ben­e­fit of this is that the same in­come is not taxed twice. There was some con­tention with re­spect to the pass-through sta­tus for rental in­come earned by the REITs from di­rectly owned as­sets, but the re­cent Bud­get pro­pos­als have ad­dressed this is­sue and ac­corded it a pass-through sta­tus, thereby mak­ing it tax­able di­rectly in the hands of the unit-hold­ers. to in­tro­duce cer­tain changes in the con­struc­tion sec­tor. Shar­ing the lat­est achieve­ments of GRIHA he com­mented that “… we have over 21 mil­lion square me­tres that have been reg­is­tered for GRIHA cer­ti­fi­ca­tion.”

So far 575 projects have been reg­is­tered, and it is ex­pected that more than 150 projects will be added this year. Dr Leena Sri­vas­tava, act­ing direc­tor-gen­eral, TERI, stressed on the rapidly chang­ing en­vi­ron­ment and the need to in­volve all stake­hold- In­di­vid­ual in­vestors will also ben­e­fit from con­ces­sional tax rates if tjeu in­vest in REITs on trans­fer of units that have been sub­ject to Se­cu­rity Trans­ac­tion Tax (STT’. The sale of units is ex­empt from tax if held for more than 36 months and units held for less than 36 months are sub­ject to tax or short-term cap­i­tal gains at the rate of 15%.

Given the cur­rent eco­nomic en­vi­ron­ment, suc­cess­ful REIT im­ple­men­ta­tion can be crit­i­cal for the re­vi­tal­i­sa­tion of the in­dus­try. It presents a dis­tinct in­vest­ment op­por­tu­nity for those in­vestors who have a risk ap­petite for real es­tate in­vest­ment with­out the need for a large cap­i­tal com­mit­ment. ers. “Cli­mate, as we know it, is chang­ing. While we want peo­ple to oc­cupy green build­ings, and there are more en­ergy ser­vice com­pa­nies step­ping in with ser­vices re­quired to fa­cil­i­tate this, it is im­por­tant that the end-users are em­pow­ered to make in­formed de­ci­sions and un­der­stand that the eco­nomics work in their favour. The need for con­certed ac­tion on en­hanc­ing en­ergy ef­fi­ciency is much higher to­day, both for global and do­mes­tic rea­sons,” she said.

In­tro­duc­tion of REIT reg­u­la­tions has been lauded as one of the most im­por­tant re­forms in the real es­tate sec­tor as it is ex­pected to bring re­lief to the cash-strapped de­vel­op­ers. It is ex­pected to free up cash for de­vel­op­ers of com­mer­cial as­sets, who have been fac­ing liq­uid­ity is­sues with limited op­tions for rais­ing funds.

REITs are es­sen­tially trusts or com­pa­nies that raise cap­i­tal by is­su­ing units or raise debt from in­vestors, in­vest di­rectly or through a spe­cial pur­pose ve­hi­cle (SPV) into rev­enue-gen­er­at­ing real es­tate as­sets such as; shop­ping cen­tres, of­fices, com­mer­cial spa­ces, etc. The in­come thus gen­er­ated from as­sets of REITs is dis­trib­uted among its unit hold­ers.

Fi­nance Act 2014 paved the way for in­tro­duc­tion of REITs in In­dia. It in­tro­duced spe­cific pro­vi­sions re­gard­ing tax­a­tion which was one of the key fac­tors for the suc­cess of REITs. It was ac­corded a ‘tax pass-through’ sta­tus which means that in­come earned by the trust would be taxed in the hands of unit-hold­ers and not trust, avoid­ing dou­ble tax­a­tion on the same in­come.

How­ever, there were some is­sues that the in­dus­try felt were not ad­e­quately ad­dressed by the fi­nance min­is­ter in the last bud­get. From a tax­a­tion stand­point, there were some is­sues re­gard­ing spon­sor tax­a­bil­ity and some of the pro­vi­sions be­ing highly tax­in­ef­fi­cient vis-a-vis the spon­sors. There were cer­tain gaps on the pass-through front, con­cerns about levy­ing div­i­dend dis­tri­bu­tion tax or DDT at the SPV level, the stamp duty on con­tri­bu­tion of as­sets to REIT, etc., which needed to be ad­dressed.

Against this back­drop, the real es­tate sec­tor was hop­ing that Bud­get 2015 would ad­dress some of the is­sues and pro­vide the much-needed im­pe­tus to the sec­tor.

The fi­nance min­is­ter in his Bud­get speech ac­knowl­edged the need to give a boost to REIT list­ing in In­dia as its suc­cess could play a piv­otal role in re­viv­ing ac­tiv­ity in the sec­tor. Bud­get 2015 amend­ments have now brought the spon­sor at par with the in­vestor by al­low­ing him to avail of the ben­e­fit of con­ces­sional tax rate on trans­fer of units of a REIT that have been sub­ject to se­cu­rity trans­ac­tion Tax (STT). Thus, short-term cap­i­tal gains aris­ing thereof would be sub­ject to tax at the rate of 15%t and tax ex­emp­tion has been pro­vided in re­spect of long-term cap­i­tal gains, a wel­come step that puts the spon­sor’s REIT units at par with other listed se­cu­ri­ties as far as the tax rates are con­cerned.

Fur­ther, rental in­come re­ceived by REIT for di­rectly owned as­sets, has been given a pass-through and is not sub­ject to with­hold­ing on dis­tri­bu­tion to the REIT. Such leas­ing in­come will be tax­able only in the hands of the REIT in­vestors and is sub­ject to with­hold­ing on dis­tri­bu­tion by REITs to unit hold­ers. The with­hold­ing is at a 10% rate for res­i­dent unit hold­ers and at the ap­pli­ca­ble rate of tax for non-res­i­dent unit hold- ers. It is yet to be seen whether non-res­i­dent unit hold­ers will be al­lowed con­ces­sional rates pre­scribed un­der the ap­pli­ca­ble tax treaties.

How­ever, some key ar­eas in­clud­ing ex­emp­tion from levy of DDT for the SPVs, ap­pli­ca­bil­ity of min­i­mum al­ter­na­tive tax or MAT on the spon­sor at the time of con­tri­bu­tion to the REIT have still not been ad­dressed. Though passthrough sta­tus has been pro­vided for rental in­come re­ceived by the REIT, no such amend­ment was made in re­spect of other rev­enue streams such as main­te­nance in­come re­ceived by REIT, mak­ing the struc­ture pos­si­bly in­ef­fi­cient.

The pol­icy is still si­lent on tax treat­ment in case of di­rect trans­fer of im­move­able as­sets to the trust and while the Bud­get ad­dressed con­cerns re­gard­ing trans­fer of shares of SPV by a spon­sor pro­vid­ing them with a con­ces­sional tax rate, the hold­ing pe­riod of three years for REIT units to qual­ify as long-term cap­i­tal as­set still does not put them at par with listed eq­uity shares for which such pe­riod of hold­ing is only 12 months.

Al­low­ing for­eign in­vest­ments in REITs can be crit­i­cal for its suc­cess­ful im­ple­men­ta­tion. Amend­ments in for­eign ex­change man­age­ment act or FEMA reg­u­la­tions for per­mit­ting for­eign port­fo­lio in­vestors or FPIs and NRIs to in­vest in units of REITs with­out any cap or re­stric­tions would be a wel­come move. Mod­i­fi­ca­tions in the ex­ter­nal com­mer­cial bor­row­ings or ECB reg­u­la­tions should also be made so that REITS can lever­age for­eign debt.

An­other is­sue that re­quires at­ten­tion is ap­pli­ca­bil­ity of stamp duty on trans­fer of as­set by a spon­sor to a REIT. Such charges etc ren­der this model as highly cost-in­ef­fi­cient.


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